Q4 2020 BlackRock Capital Investment Corp Earnings Call
Please standby were about to begin.
Good morning, My name is Jennifer and I will be your conference facilitator today for the Blackrock Capital investment Corp, fourth quarter, 2020 earnings call.
Hosting the call will be James Keenan, Chairman and interim Chief Executive Officer, Nick single President of the company.
And I'd be Miller, Chief Financial Officer, and Treasurer, Lawrence Pruritus, and General Counsel and corporate Secretary of the company.
Marshall Merriman head of portfolio management.
And Jason married managing director and member of the company's investment Committee.
Lines have been placed on mute after the speakers complete their update they will open the line for a question and answer session and.
In order to ask a question and you can press star one.
And telephone.
Thank you and Mr Paradis.
You may begin the conference.
Good morning, and welcome to the fourth quarter and year end, 2020 earnings Conference call and Blackrock Capital investment Corp won't be see I see.
Before we begin our remarks today I would like to point out that certain comments made during this conference call and web.
And corresponding documents contain forward looking statements and subject to risks and uncertainties.
Many of these forward looking statements can be identified by the use of words, such as anticipates believes expects intends will should may and similar expressions.
The call to your attention and the fact that D. C items actual results may differ from these statements.
As you know D C I see as filed with the SEC reports, which list some of the factors, which may cause D. C. I see these results to differ materially from these statements.
I see I see assumes no duty to and does not undertake to update any forward looking statements. Additionally, certain information discussed and presented amazed and derived from third party sources and has not.
Not been independently verified.
Accordingly P C.
She makes no representation or warranty with respect to such information.
Please note we've posted to our website and the investor presentation that complements this call shortly Jim will highlight some of the information contained in the presentation.
The presentation can be accessed by going to our website at www Dot Blackrock Dkc C dot com and clicking the March 2021, investor presentation and like in the presentations section of the investors page.
I would now like to turn the call over to Jim.
Thank you Larry.
Good morning, and thank you for joining our fourth quarter earnings call.
Yeah, I'm going to provide an update on <unk>.
And progress made towards our strategic goals.
And the Oregon and after the fourth quarter.
I will also provide an overview of our fourth quarter performance and that will remain and near term priorities.
And it all will then give an update on our performance status and activity.
And I didn't know and I will follow with a discussion on loss and yesterday's knows more detail before we open the call to questions.
Because we have stated in the past a primary strategic priority has been to rotate out of non core legacy and other junior investment and redeploy the capital from two primarily senior secured first lien loans.
Overall, adjusted generating stable recurring income and reducing the volatility of our net.
Asset value.
I'm pleased to report that we have made significant progress in 2001 towards achieving these goals and continue to do so as we move into 2021.
During and subsequent to the fourth quarter.
And we did over $170 million of non core and the other juniper and investments.
This puts us on non core holdings to $40 million.
And in 'twenty.
And she is non pushing our total portfolio at fair market value.
Down from 16% at December 31st 2019.
Our current portfolio consists of 58 per some first lien loans.
28% second lien and 14% junior capital.
The junior capital concentration is down from 43% and at the beginning of 2020.
If we adjust for our agent partners and equity interest in D. C Zone, which now consists of four first lien loans and cash on the balance sheet, our profile and less exposure to first lien loans is 65 per cent.
We have also made good progress and reducing portfolio concentration and achieving greater diversity of the portfolio now consist of.
And companies.
And we're confident that as we selectively deploy capital into new investments, we will reach our target.
And we 17 portfolio companies.
Our credit quality remains solid with only four investments on non accrual at year end.
And includes our 23 billion dollar unsecured debt and investment and Gordon Brothers Finance company with J P. F C.
You had mentioned last quarter. This investment is expected to be down gradually as GBS he realizes recoveries on certain assets.
And the sale of its portfolio to California and in November of last year.
And so yeah, we feel like he has already received $10 million from these residual assets.
Excluding J D F C.
And recently really non accruals represented only one two per cent of our total portfolio at fair value.
One of those investments returned to performing status in the first quarter of 2021.
Overall.
Feel very good and not the credit quality of our portfolio.
In addition, we reinstated our old accounts dividend from the first quarter and maintain the rate of 10 cents per share.
We appreciate the patience of our shareholders well, we paid a portion of our dividend and stock and the last three quarters, there's a way to bolster our and easy.
With the strategic portfolio, and it's largely behind us and the redeployment strategy firmly taking hold.
We feel very comfortable returning to a all cash.
Good day.
The significant derisking that we accomplished is expected to compress our NII and the near term.
And with our current leverage at roughly four times from a quarterly and on a run.
Run rate is expected to be.
Two six cents per share range.
We expect the NII run rate to grow into our dividend over the coming quarters and we read it.
Wanted to free up capital and interest.
Printed matter.
Finally, we are still authorized to repurchase up to seven 5 million shares of our common stock.
Our share repurchase plan and did not kick in during the fourth quarter.
Given the significant improvement in our leverage profile and our ongoing discount to any day, we'd have to increase the capital allocated towards share repurchases under and tend to be five one and then 10 B E T plan.
I'll now turn the call over to next and go on to discuss our portfolio activity in further detail.
Jim and.
And as Jim mentioned, we made significant progress and exiting or $170 million and non core and other junior investment since the end of the third quarter.
Is it all just drivers of this were $87 million, we received from our investment and the GBS the unsecured debt.
By the $39 million repayment.
Our investment and first Boston construction holdings, and a $27 million return of capital.
Equity investment and V C. I C S L b.
We also successfully exited our $9 million of possession and CEB H D. D Holdings and received $6 million partial payment on our second lien investment and the Red Apple.
In addition, there were approximately $67 million and repayments from our core holdings.
This was primarily driven by strong refinancing activity during the fourth quarter and the economy began to pick up and the capital markets opened up.
With respect to origin nation.
We had gross deployments of $91 million during and after the fourth quarter spanning 13, new and five existing portfolio companies.
Approximately 75 per cent of our originations were first lien loans.
Our pipeline of new opportunities remains robust and we're seeing less repayment activity and the first quarter.
We are maintaining our disciplined approach and let things executing only a small percentage of the opportunities.
We're seeing opportunities across a variety of industries, and generally and continue to invest and less cyclical businesses.
We have primarily co investing with other Blackrock funds, which enables us to participate and larger transactions without taking on too much concentration risk.
And we continue to emphasize transactions, where we lead or co lead negotiations on their terms.
The details of our new investments and be found and the earnings release.
Some of our more prominent investment include the following.
First name LIBOR, plus six and two five per cent and term loans.
Joyce holdings, and well established direct to consumer skin care brand.
Blackrock led and investment of $175 million and the smell of which you see I stay invested $7 $8 million.
And firstly, LIBOR plus 7% to term loans.
And unfunded delayed draw from them good threats yet.
Consolidator of small and medium sized brands that sell through Amazon's third party platform.
Blackrock committed $125 million did this transaction.
Which you see I see.
And committed $7.8 million across the two tranches.
And secondly, LIBOR plus 9% from loans with team services group and leading provider of self directed home theater systems or the elderly and people with disabilities.
Blackrock provided the entire 85 million dollar trends.
Rich.
We invested $5 $8 million.
Our core portfolio with an increasing percentage of first lien loans has continued to perform well despite independently.
As Jim mentioned, excluding Gee, we have to say there are only two investment currently on non accrual vote.
Fair value.
During the fourth quarter or any other increased by $8.4 million or two eight per cent from the prior quarter.
And that's really driven by 0.8 per cent increase due to realized and unrealized gains and <unk>.
And maybe a 2% due to sharing a portion of dividend and stock.
And then the per share declined by one and $4.23 per share due to the associated increase in share count.
As Jim mentioned earlier, we are pleased or worked through and all cash dividend this quarter.
Now that we have substantially completed the repositioning of our portfolio.
Our focus in 2021, well then you could deploy our liquidity and the core investment consistent with our objectives of stable income and low volatility.
As we do this our goal is to bring it back leverage normalized levels over the next several quarters and we will do so and the selective manner.
And if anything from the broad funnel of opportunity that our platform provides.
And the Derisking of our portfolio also provides a significantly higher flexibility and managing our capital structure.
And Ken to address both the 2022 and maturity of our convertible notes as well as working on extending our credit facility.
And here.
I will now turn the call over to Abby Butler.
Discuss our financial results for the quarter.
Thank you Nick I will take a few minutes to review additional cash and like all for the fourth quarter of 2020.
GAAP net investment income and I was seven $3 million or 10 cents per share from the fourth quarter and weapons and I want them in day, 1% coverage of our southern and <unk> 2 million distributors and for the class.
And that's net income for the quarter was $14 6 million down $1 7 million or 10.4 from CAD from the third quarter, primarily driven by a 12.3 per cent decrease and the average investment portfolio side combined with PD assays I think your debt going on non accrual.
During the quarter.
Compared to the fourth quarter of 2019.
And last net income increased 4.6 million also primarily against and he has been going on non and cool and.
As well as a $17 one per cent decrease and the average investment portfolio side.
Total expenses net.
And instead of management and the waiver, Okay, wellpoint, and 5 million or six point and a lot of at bats, and the third quarter, primarily as a result of a smaller average portfolio, which translate into lower base management fees and lower interest expense quarter over quarter.
Compared to the fourth quarter of sales and Langhorne net expenses decreased $2 3 million or 23 six per pad mainly.
And net incentive fees base management fee and interest expense carry all up here yet.
And the fourth quarter, we voluntarily waived or incentive fees and other.
One quick thing and.
Bringing our cumulative and harmony and Philippines day since March 2017, and 29 7 million.
Additionally, there was no accrual for incentive management fees based on volume.
During the fourth quarter net realized and unrealized gains were two 6 million, primarily driven by markets and parts thoughts debt right.
Apple and some core assets.
These gains were partially offset by markdown and E D. A C and D C. I E S. L P.
As of December 31st 'twenty, and 'twenty, we had a strong liquidity position at approximately 285 million from our availability under our credit facility and cash on hand.
Our net leverage ratio was 0.51 times at year and and as of February 23rd had declined further to zero quiet and four three times debt.
Two additional repayments that we've received subsequent to year and as.
As Nick mentioned, we expect to gradually return to normalized level as we redeploy capital and grow our portfolio overtime.
Net asset value was 315 million dollar.
For dollar and 23 cents per share, which included the impact of $5 8 million dividends paid in stock and December 30th 2020.
And as the less and we announced the resumption of our all cash dividend for the first quarter of 2021.
And on April seven we will pay a cash dividend of <unk> per share to stockholders of record at the close and take that.
On March 17.
During the fourth quarter no shares were rate per tool.
And seven five and I'll share remained available for repurchase under the current and program as of December 31, 2020 with that I would like to tie and the call backs again.
Thank you and.
In closing I would like to take a moment and thank our stockholders for their ongoing support and euro.
And our team for their continued hard work and creating guidance for non core divisions.
We are excited about the pipeline of opportunities from the advisers middle market lending platform.
Manages over $15 billion per capital and is supported by approximately 50 dedicated investment professionals.
Above all and I hope, everyone remains safe and healthy during this ongoing pandemic.
This concludes our prepared remarks.
Operator, we'd like to open the call for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off until by your signal treat dark what net again press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for a question.
And.
And we'll go first to Finian O'shea with Wells Fargo Securities.
Hi, good morning, everybody.
First question on and I suppose naturally.
G. B F. C can you provide some color on.
What happens there underneath the entity or or at least the unsecured.
Claims.
Composition and and also is it still.
And there is it still paying cash.
Yes.
I said this is Nick Thank you for your question so.
We had mentioned last quarter would you be F. C sold all of its investment portfolio.
Teledyne and November last year post that transaction and.
And that's with a basket.
Digital assets mature, namely, they're entitled to up to $40 million recovery works through the first and not especially and note and the portfolio that was sued and it.
Italy, and there's an earn out no within maximum potential recovery of $15 million.
There was a warrant positions and an existing portfolio company that Judy and she actually monetize and December and that was used to returned $10 million of capital could be CIC and then initially there was some cash and from escrow proceeds approximately $1 million.
Those are traditionally but to be see I see.
Yeah, none of these assets are income generating.
As a result debt unsecured note.
Does not pay and income and is not expected to do so we view that as a is it like a replay and like I mentioned that already see and.
Approximately $10 million of recoveries, while net fees.
So the non accrual was more a result of of moving stuff around that.
Anything that happened underneath fundamentally.
Correct correct. So all of the income producing a portfolio of loans were sold as part of debt transactions and none of these sort of residual assets actually are our income generated.
And and at this point really that's the only and you would you be actually unsecured debt is the only non accrual.
Position and the portfolio the two other non accruals and the portfolio, but they actually have fair market value.
Yeah.
Okay. Thanks, that's helpful and another question on the dividend.
How is the how is there such a high.
Return of capital component.
Given that you.
Over earn the dividend on NII and.
And I figured there'd be even more taxable income with non accruals. So a pretty big surprise, if you could give some color on that.
Hi fan this is Eddie thank him from the question as you pointed out that our total year and I was 34 million and total distribution declared was 31 million. The main rock that you mentioned was due to.
Tax characteristics of our distribution, so with anything tax there's more complication and the tax code allows the fourth quarter and declared distributions that's paid in January to be counted towards either prior year or current year.
And distribution numbers. So this is our January 2020 distribution, where it was counted two way the 2020 tax distribution. So the way to look at it and that that box number we disclosed is from a tax perspective and.
That was driven by the January 2020 and distribution.
Okay. That's helpful. Thank you and just last one from me can you.
Providing an update on the on the D C I see.
Efforts to two extra debt or liquidate.
And any progress post quarter, and what Youre thinking there now.
Yes, and this is.
Is mix or you just is.
Other questions specific to remaining non core position.
Physicians and other equity.
Capital.
No.
Sorry.
Are you worried that I gave you the wrong are accurate and their E. S. L. A.
Yes, yes, yes.
Yeah, So that's day that you've seen and alone.
J D.
We conducted a portfolio sale and Q4 of last year.
And that sales resulted that process resulted in the sale of 14 out of the 18.
Firstly names that debt vehicle Haley.
Net sales, enabling debt vehicles to retire its and beverage and full and return and especially with $23 million of capital D. C. I see okay.
Those remaining four names one was partially sold and and January of this year, which resulted in another $4 million.
And they're gonna capital. So you know that portfolio now and it's just you know for first lien positions and some cash and completely and unless.
Unlevered basis, we will continue to look for opportunities.
To exit those investments at attractive levels.
Okay very well that's all from me. Thank you.
Thank you Sir.
We'll go next to Melissa Wedel with Jpmorgan.
Good morning, everyone and thanks for taking my questions today.
Wanted to make sure and thinking about the and activity and our portfolio the right way.
I appreciate the additional disclosure provided and that's different.
That's true and most of February and if we're looking at that right.
Does that sort of translate into or imply you know originations around 30 million ish and so far and Q1 person.
About 58 of exit so.
So far and Q1.
Thanks Melissa.
Jimmy here no I appreciate it I think there are a couple of things.
And with regard to the basically the deployment, obviously last year was a a fairly volatile year and.
And we saw activity slow down and the market and obviously, we should go down.
And with regards to their own book and you're kind of Q2 Q3 timeframe. It really picked up and the end of the year, but also repayments.
Started to pick up pace as well, but for the most part a large part of our our repayments were Oh.
Exiting out of non core and legacy positions.
As we look forward.
And there's going to be some volatility around the.
The timing and Kohl's and I would say the selective nature that we have with regards to the types of deals that we're looking at.
So I would say, there's upside and downside.
And we can argue too.
And increase with regard to that number we kind of thinking and.
And in aggregate and we should see five to 10 day two deals.
And as we add diversification across the quarter.
And firstly you didn't were generally closing and that kind of mid single digits as the amount of deals that we see and you know if you look at our hopes and when is it expected hold times and I would say you know that number we would expect to be that greater than $30 million averaging over the next couple of quarters, and so probably somewhere in the range of 30 to 50, but you can't Miss.
He's determined that exactly.
Exactly just because it depends on the quality of the deal flow that is coming in.
Okay.
And from a couple of follow up questions on the dividend and.
Sort of just the thinking of returning to an all cash dividend at the current level.
And while expecting from compressed NII over the near term.
And can you just talk about the process and thinking through that and then.
You know, whether or not and the interplay between that and allocating capital to share repurchases right now.
Thanks, Let's say, yes, that's exactly right that's exactly right and obviously as and we went through from 2020 environment.
We have known and also the.
Uncertainty and volatility risk with regards to our junior capital and equity positions and we were in a different.
Please and.
Honestly we.
And the distributor in terms of dividend and stock and I think as we look into two panels and in 'twenty and we've been able to exit a significant portion of our equity positions and they are going to more a non core assets.
Obviously, leverages come down significantly and that dynamic as you look forward.
And one we have more conviction with regards to the book and returning to an old cash.
Dividend.
But two with regards to the balance of the kind of a free things that we look at trying to return capital to shareholders is first and foremost as that deployment.
Just discussed and really adding more diversification across a broader range of first lien notes and other.
And that will take time, but over the next couple of quarters, and then debt the balance of Oh, we're distributing the dividend two and had some stability and managing that.
And that dividend as we grow into it as we redeploy and lastly, as and as you have.
Allocating towards stock repurchases, which are weak.
We've disclosed and the book with regards to the seven and a half million dollars shares and will have a programmatic plan that's in place.
So it's really those three measures.
Okay. Thank you.
Thanks, Michael.
And at this time I'll turn the call back to the speakers for closing remarks.
Yeah.
Thank you operator, and I think that concludes the call. Thank you every everyone for the.
And the continued support and and and the portfolio and the company and look forward to the continued progress and transition and full transition and.
And with regard to the company's go forward strategy, Thanks, again, and a safe and healthy.
This does conclude today's conference we thank you for your participation and.
And.
And.
[music].
Yeah.
[music].
Hum.
[music].
Yeah.
Okay.
Yeah.
Okay.
[noise].
Okay.
[music].
Yeah.
[music].